Thursday, June 23, 2016

The FGB/NBAD Merger in a Global Context

Both the Size of the Fish and the Size of the Pond are Important

Recently, the GCC financial market has been all aflutter following reports of a potential merger between First Gulf Bank (FGB) and National Bank of Abu Dhabi (NBAD).  

Weighing in at a hefty $170 billion plus in assets, the new entity would displace QNB as the largest bank in the GCC.

Reuters noted that the new bank’s market capitalization of $30 billion “would make it more valuable than Credit Suisse Group AG, Standard Chartered Plc or Deutsche Bank AG.”   
http://gulfnews.com/business/sectors/banking/what-you-need-to-know-about-abu-dhabi-s-plan-for-a-megabank-1.1849855

Quite impressive until one looks a bit closer.
First, as to the “more valuable” comparison.  Fair enough, but the banks mentioned aren’t exactly in ruddy health. 

DB currently trades at a princely 0.29x book value. CS at about .546x, and Stan Chartered at about .55X.  
P/BV ratios like these are not signs of robust positions.  It seems strange—perhaps only to AA—to compare the UAE and GCC’s new “champion” to banks in such situation. 

AA might be forgiven for also wondering if price discovery and thus market valuation in the markets that DB, CS, and Stan Chartered trade in is more robust than markets in the UAE, particularly when free float is considered.
NBAD is roughly 69% owned by a single non-trading shareholder and so free float is 31%.  FGB reportedly has about 88% free float.  AA was told some years ago, that the bank was actually majority owned by the two sons of Sh. Zayed who were Chairman and Vice Chairman. 

However, I will not contradict the records of the ADX nor the basis on which MS made the determination to include FGB in its MSCI index.  
Second, some comparative metrics to put the new  bank in a global context.

Total assets of GCC banks as of 31 March 2016 were some $2 trillion, according to AA’s analysis of GCC central bank reports.  Note that the data for Bahrain that I used was dated 3Q15, the latest information I could find on CBB’s website.   All the other central banks reported data as of 1Q16.
At 31 December 2014, ICBC of China held $3.3 trillion in assets.  Another 12 banks each held more than $2 trillion.  That means that each of these individual banks was larger than the entire GCC banking sector and obviously much larger than a FGB/NBAD merged entity.  That same data shows that the 50th largest bank held $656 billion. 

By comparison, as per FRB data, $173 billion in total assets would earn the ranking as the 13th largest bank in the USA.

https://www.gfmag.com/magazine/november-2015/biggest-global-banks-2015

Even more telling, according to 2015 data, three banks had more than $173 billion in market capitalization (Wells Fargo, ICBC, and JPMorgan).   That is, the market value of their equity was larger than the NBAD/FGB merged entity’s total assets.  Based on that data, $30 billion in market capitalization would merit 50th place.  

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